GDP, or Gross Domestic Product, is a measure of the value of finished goods and services produced by a country, specifically within its borders over a certain time frame. This is different from GNP, or Gross National Product, which is a measure of the goods and services produced by a country’s citizens regardless of where they live. You may have heard about GDP recently in the news as a positive indicator of our economy because it has recently surpassed expectations. Why is this a good thing?
You can think of GDP as a measure of how much a country is able to produce. When a country is able to produce more than it did previously, it is likely able to bring in more revenue for those goods and services as a whole. This means that the economy is expanding which is an ideal situation for job creation and wage growth. The U.S. is currently on track for one of its longest economic expansions in the history of our nation – something economists have been keeping a close eye on. While GDP is not always correlated with the financial markets, it can impact them especially when there is a “surprise” in the numbers. This happens when reported GDP is notably higher or lower than what economists and the financial markets predicted.
As we’ve noted in the past, financial markets are pretty efficient at pricing in all available information. When news comes out that’s different from what the markets had been expecting, they have to adjust, which is why you may see market movement from different economic announcements. This does not, however, mean that a positive GDP will equate to positive market returns. GDP is just one of many economic indicators and variables that influence the financial markets.